Opinion
Case No. 03-46590 Jointly Administered.
December 29, 2004
Report and Recommendation of Bankruptcy Judge
TO: Honorable John H. McBryde, United States District Judge.
Comes now Dennis Michael Lynn, U.S. Bankruptcy Judge, and makes this, his report and recommendation respecting Potomac Electric Power Company's Motion to Withdraw the Bankruptcy Reference and Supporting Brief (the "Motion") filed December 16, 2004 by Pepco. Pursuant to the Motion, Pepco asks that the District Court withdraw the reference to the bankruptcy court of (i) Debtors' Consolidated Omnibus Objection to Proofs of Claim filed by Potomac Electric Power Company and Pepco Energy Services, Inc. (the "Objections"); (ii) Potomac Electric Power Company's Motion Pursuant to 11 U.S.C. § 362(d) for Relief from the Automatic Stay (the "Stay Motion"); (iii) Pepco's Emergency Motion for Payment of Administrative Expenses (the "Cost Motion"); and (iv) Pepco's Verified Complaint for Preliminary Injunction and Declaratory Judgment (the "Adversary").
Terminology used herein is consistent with usage familiar to the District Court from prior proceedings. See, e.g., In re Mirant Corp., 378 F3d 511 (5th Cir. 2004).
The Motion actually seeks withdrawal of the reference as to "Pepco's Motion for Administrative Claim." Pepco, however, in the Cost Motion, which appears to be the pleading referred to in the Motion, asks for payments due it under the Back-to-Back Agreement.
Pepco asks that the District Court withdraw the reference as to "Debtors' Notice of Suspension." The Notice of Suspension, however, does not request any relief; issues surrounding the Notice of Suspension are subsumed in the Adversary, as are any issues relating to scheduling in connection with the Adversary.
I. Introduction
As required by Local Bankruptcy Rule 5011.1, your bankruptcy judge conducted a status conference on the Motion and the responses filed by Debtors and the Official Committee of Unsecured Creditors of Mirant Corp. on December 21, 2004. At the status conference, Pepco, Debtors and the Official Committee of Unsecured Creditors of Mirant Americas Generation, L.L.C. argued concerning the Motion. Following the status conference, your bankruptcy judge took the Motion under advisement.
The District Court is fully apprised regarding the various relationships of the parties. The District Court has also kept well informed regarding the progress of these chapter 11 cases. It is only relevant to add that the Debtors have advised your bankruptcy judge that they expect to file a plan (or plans) of reorganization by mid-January. While the relationship among Debtors, Pepco and other parties in interest — and the disputes between Debtors and Pepco — are enormously significant to Debtors, except as discussed below in connection with claims estimation, Debtors' successful reorganization does not appear to depend on resolution of the matters covered by the Motion.
In the Motion and at the status conference, Pepco took the position that anything related to the APSA or the Back-to-Back Agreement was subject to mandatory withdrawal of the reference pursuant to 28 U.S.C. § 157(d). This view appears to be premised on a mistaken, or at least overly-broad, reading of the Fifth Circuit's decision in In re Mirant Corp., 378 F.3d 511 (5th Cir. 2004). Pepco cites Mirant for the proposition that withdrawal of the reference was mandatory as to Debtors' motion to reject the Back-to-Back Agreement. To the contrary, though it declined Debtors' request that that matter be remanded to the bankruptcy court, the Court of Appeals ( 378 F.3d at 526, n. 7) stated that nothing in its opinion "should be understood to imply that the district court cannot refer this case back to the bankruptcy court."
Clearly, the opinion of the Court of Appeals does not provide support for Pepco's argument that mandatory withdrawal is required as to every matter having to do with the APSA or Back-to-Back Agreement. Rather, the Court of Appeals left retention or reference, even of the motion to reject the Back-to-Back Agreement, to the discretion of the District Court, something it surely would not have done if withdrawal of the reference were mandatory.
Your bankruptcy judge finds no basis for concluding that the Motion covers any matter that is as related to the Federal Power Act as was the motion to reject the Back-to-Back Agreement. Consequently, at the status conference, your bankruptcy judge advised the parties he did not consider mandatory withdrawal appropriate but would report and recommend to the District Court as to discretionary withdrawal pursuant to the Motion.
II. Discussion
In determining whether or not to withdraw the reference (if withdrawal is not mandatory), the Fifth Circuit has stated:
[In a matter raising core, debtor-creditor issues] considerations of judicial economy also bear on the decision to withdraw the reference . . . The district court should consider the goals of promoting uniformity in bankruptcy administration, reducing forum shopping and confusion, fostering the economical use of the debtor's and creditors' resources, and expediting the bankruptcy process.
Holland Am. Ins. Co. v. Succession of Roy, 777 F.2d 992, 999 (5th Cir. 1985); see, to similar effect, 1 COLLIER ON BANKRUPTCY ¶ 3.04[1] (15th ed. rev. 2004). In making a recommendation to the District Court, the bankruptcy court must apply this analysis to each of the matters covered by the Motion. However, given the District Court's familiarity with these chapter 11 cases, the matters covered by the Motion and the law applicable under 28 U.S.C. § 157(d), your bankruptcy judge will limit his report and recommendation accordingly.
A. The Objections
The Objections are clearly core proceedings. 28 U.S.C. § 157(b)(2)(B). The Objections assert various bases for disallowance of Pepco's claims. First, Debtors assert that Pepco has filed claims against certain of Debtors that have no liability to Pepco. Second, Debtors raise questions about the calculation of certain of Pepco's claims. Third, Debtors argue satisfaction (payment) of part of Pepco's claims. Finally, Debtors argue that Pepco may not recover on its claims by reason of section 502(d) of the Bankruptcy Code (the "Code").
11 U.S.C. § 502(d) states:
Notwithstanding subsections (a) and (b) of this section, the court shall disallow any claim of any entity from which property is recoverable under section 542, 543, 550, or 553 of this title or that is a transferee of a transfer avoidable under section 522(f), 522(h), 544, 545, 547, 548, 549, or 724(a) of this title, unless such entity or transferee has paid the amount, or turned over any such property, for which such entity or transferee is liable under section 522(i), 542, 543, 550, or 553 of this title.
11 U.S.C. §§ 101- 1330.
Applying the factors cited in Holland America to the Objections, it does not appear that judicial economy would be meaningfully affected by withdrawal (or non-withdrawal) of the reference. The District Court is certainly as familiar as the bankruptcy court with the documents underlying Pepco's claims — the APSA, the Back-to-Back Agreement and the TPAs. Your bankruptcy judge does not understand that Debtors contest that Pepco (subject to Code § 502(d)) is entitled to assert a claim of $105,000,000 against two of Debtors. Because Pepco's other claims probably do not total enough to affect the outcome of Debtors' chapter 11 cases, the needs of efficient administration of these cases do not militate meaningfully against withdrawal of the reference. Similarly, it does not appear that consideration of the Objections by one or another court is likely to lead to inconsistent results.
Pepco's other claims will likely total no more than $27,000,000. Should early quantification of these claims prove necessary to Debtors' reorganization, the claims may be estimated by the bankruptcy court or, at its election, the District Court.
Debtors argue that the pendency of voidable transfer actions against Pepco favors retention of jurisdiction over the Objections in the bankruptcy court. At the time of the status conference, however, no voidable transfer causes of action (of conceivable merit) had been filed or described with specificity by Debtors. Even if such actions are brought by Debtors, they would be in the nature of counterclaims divisible (and separately triable) from the Objections under the procedures adopted by the bankruptcy court. See Memorandum Order entered on October 22, 2004 on the Bankruptcy Court docket in matter number 03-46590-DML-11, Slip Op., p. 5.
Forum shopping may be a concern in this case. Your bankruptcy judge discusses this below.
Pepco urges the reference should be withdrawn as to the Objections because of the relationship of Pepco's claims to the APSA. It does not appear, however, that there is peculiar expertise in either the bankruptcy court or the District Court that would favor choosing one over the other to foster judicial economy. On the other hand, it remains possible that the APSA (or the Back-to-Back Agreement; see Memorandum Opinion and Order entered on December 9, 2004 on the District Court docket in matter number 4-03-CV-1242-A, Slip Op., p. 10) will be rejected by Debtors.
Your bankruptcy judge assumes the District Court will determine any rejection issues. As rejection of the APSA (or Back-to-Back Agreement) would create additional claims by Pepco, on balance it makes better sense to have all of Pepco's claims heard and determined by the same court. Accordingly (and subject to the discussion of forum shopping below), your bankruptcy judge respectfully recommends that the Motion be granted as to the Objections.
B. The Stay Motion
Remarkably, in the Stay Motion Pepco seeks relief from the automatic stay of Code § 362(a) not to proceed against Debtors before FERC or to enforce the APSA in another forum or to terminate the APSA. Rather, unique in your bankruptcy judge's experience, Pepco apparently wishes to retaliate against Debtors for ceasing payment under the Back-to-Back Agreement by itself terminating its performance of other parts of the APSA. It is to that end Pepco wishes to be freed from the strictures of the stay.
It is odd that Pepco would indicate an intent to breach the APSA. If, as Pepco has previously argued, the APSA falls under FERC's jurisdiction and rejection (breach) of the APSA would implicate the Federal Power Act, it would seem Pepco is requesting relief from the stay in order to violate the Federal Power Act.
The Stay Motion is a core proceeding. 28 U.S.C. § 157(b)(2)(G). Indeed, the automatic stay is the lineal descendant of relief afforded by the bankruptcy court on a case-by-case basis. Under the former bankruptcy act, stays protecting a debtor and its estate were granted by the bankruptcy court.
The Bankruptcy Act of 1841 did not contain a provision staying creditor action against debtors. The Supreme Court held in Ex Parte Christy, 44 U.S. (3 How.) 292 (1845), however, that the bankruptcy courts possessed the power to enjoin creditor action against property of debtors in custody of the bankruptcy courts. This ruling expressed a fundamental premise of bankruptcy law — that a "bankruptcy court, as a court of equity exercising in rem jurisdiction over assets in its custody and control, can protect its jurisdiction by injunction, whether or not such power is expressly set forth in the bankruptcy statute in force." 3 COLLIER ON BANKRUPTCY § 362.LH[1] (15th ed. rev. 2002). Section 2a(15) of the Bankruptcy Act of 1898 provided the bankruptcy courts with the power to issue injunctions, but such injunctions would only be issued at the request of and upon the filing of a verified pleading by the debtor, and such injunctions were issued consistent with federal standards for issuance of injunctions outside the context of bankruptcy. In 1938, the Chandler Act was passed and added Chapters X, XI and XII to the Bankruptcy Act of 1898. Automatic stays were provided for under section 148 of Chapter X and section 428 of Chapter XII. However, the automatic stay contained in section 148 did not take effect unless and until the court approved a petition (which did not necessarily occur quickly after filing) and the automatic stay of section 428 affected only actions to enforce liens against real property. Section 314 of Chapter XI and section 414 of Chapter XII also provided for the issuance of stays to enjoin lien enforcement by creditors, but both provisions required prior notice and a showing of cause by the debtor to receive the stay. It was not until 1973 and the enactment of former Bankruptcy Rules 401, 601, 10-601, 11-44, 12-43 and 13-401 that debtors were provided with the protection of a wide array of stays arising automatically upon filing. The automatic stays provided by the rules were the predecessors of present Code § 362(a).
A request for relief from an injunction entered by a court should be directed to that court. Celotex Corp. v. Edwards, 514 U.S. 300, 313 (1995); Pratt v. Ventas, Inc., 365 F.3d 514, 520 (6th Cir. 2004). Although section 362(a) is invoked automatically, conceptually it is equivalent to a stay issued by the bankruptcy court. The stay is a critical element of administration of the case in which it applies, and its modification or termination is best considered by the court in which the case (here Debtors' chapter 11 cases) is pending. Thus, your bankruptcy judge believes it would be inconsistent with uniformity in bankruptcy administration to withdraw the reference as to the Stay Motion.
Though your bankruptcy judge has found no case that addresses withdrawal of the reference respecting a motion for relief from stay, the two cases found that even discuss withdrawal of the reference in a lift of stay context at all certainly do not support granting the Motion. In re Pruitt, 910 F.2d 1160 (3d Cir. 1990); NCT Computer Servs. v. Capital Computer Sys., 755 F.2d 1253 (6th Cir. 1985).
Moreover, efficiency and judicial economy are not served by such withdrawal of the reference. Whether or not the Stay Motion is granted will be dependent upon the existence of "cause" (Code § 362(d)(1)). This requires determination of whether Debtors' non-payment under the Back-to-Back Agreement constitutes "cause" for purposes of section 362(d)(1). That determination, in turn, does not (as does resolution of at least some of the Objections) depend on the terms of the APSA or future disposition of the APSA or the Back-to-Back Agreement.
As there is no question that Debtors are not paying Pepco as required by the Back-to-Back Agreement, it appears that grant or denial of the Stay Motion will turn on whether, as a matter of law, that constitutes "cause."
Accordingly, your bankruptcy judge recommends that, as to the Stay Motion, the Motion be denied.
C. The Cost Motion and the Adversary
The Cost Motion seeks relief substantially the same as the declaratory count in the Adversary. The balance of the Adversary relates to injunctive relief sought by Pepco. As Debtors note, the issue of entitlement to injunctive relief was previously referred by the District Court to the bankruptcy court. Because, upon the District Court's referral, the bankruptcy court has already had proceedings concerning injunctive relief, your bankruptcy judge will not address that aspect of the Adversary for purposes of the Motion, it appearing self-evident that the reference should not be withdrawn on the basis of that particular request for relief.
As to the Cost Motion and the balance of the Adversary, it may be premature to address the character of Pepco's claim arising form Debtors' breach of the Back-to-Back Agreement. If the Back-to-Back Agreement is assumed (as part of the APSA or otherwise), arrearages due from Debtors will have to be paid as costs of administration. See Code §§ 365(b)(1) and 365(g)(2). If the Back-to-Back Agreement is ultimately rejected (as part of the APSA or otherwise) the claims of Pepco will be unsecured claims. See Code § 365(g)(1); In re Mirant Corp., 378 F.3d at 520; K-4, Inc. v. Midway Engineered Wood Prods., Inc. ( In re Treesource Indus., Inc.), 363 F.3d 994, 998 (9th Cir. 2004); Mason v. Official Comm. of Unsecured Creditors ( In re FBI Distribution Corp.), 330 F.3d 36, 42 (1st Cir. 2003). If rejection occurs, post-petition amounts due to Pepco from Debtors would only be entitled to cost priority to the extent Pepco's concomitant performance benefited Debtors' estates. See Data-Link Sys., Inc. v. Whitcomb Keller Mortgage Co., Inc. ( In re Whitcomb Keller Mortgage Co., Inc.), 715 F.2d 375, 380 n. 5 (7th Cir. 1983); In re Waste Sys. Int'l, Inc., 280 B.R. 824, 826 (Bankr. D. Del. 2002); In re MCS/Texas Direct, Inc., No. 02-40229-DML-11, 2004 Bankr. LEXIS 379, *11-12 (Bankr. N.D. Tex. March 30, 2004). Because "benefit" will be determined in part based on whether Pepco's performance (and the resulting benefit) is assessed based on the APSA or just the Back-to-Back Agreement, it would be difficult to determine at this time.
In any event, the analysis of benefit to Debtors' estates will not require quantification of Pepco's claim. Regardless of priority, the claim will be calculated the same way as to amount under the Back-to-Back Agreement; the only issue presented by the Cost Motion and the applicable portions of the Adversary is how much, if any, of that claim is entitled to cost of administration priority. This issue is typically before the bankruptcy court. As both the Cost Motion and the Adversary are core proceedings ( 28 U.S.C. § 157(b)(2)(A)), and since the issue presented is not entangled with matters before the District Court, your bankruptcy judge recommends the reference not be withdrawn as to the Cost Motion or the Adversary.
D. Forum Shopping
Your bankruptcy judge believes that motions to withdraw the reference are serving a tactical purpose in the dispute between Pepco and Debtors. Pepco's decision to file the Motion appears to have been brought about due to Debtors' last minute objections to a proposed scheduling order. This suggests Pepco was not motivated to file the Motion by the reasons for which withdrawal of the reference is ordinarily granted. Considering the unusual nature of the relief sought in the Stay Motion and that Pepco has not taken the logical step of filing a motion under section 365(d)(2) to force Debtors to assume or reject the APSA, your bankruptcy judge believes both Pepco and Debtors are positioning themselves for future litigation or, perhaps, settlement discussions. Though use of jurisdictional options for tactical purposes does not necessarily equate to forum shopping, the District Court may wish to consider this in determining the Motion.
The following is an excerpt from the transcript of a status conference held on December 8, 2004 concerning issues relating to the litigation between Pepco and Debtors (Jonathan Guy appeared for Pepco and Christopher Shore appeared for Debtors):
MR. GUY: Your Honor, this is the absolute first time Mr. Shore has proposed that time schedule to me. We have been working off a very different scheduling order until this morning, in fact, which we thought we had agreement on. So it makes it very difficult for me, as always, with these last minute changes.
THE COURT: All right. Then I've got a good solution. Monday morning you will have on my desk a proposed scheduling order by PEPCO and a proposed scheduling order by the debtor and I will issue a scheduling order by Wednesday at the latest.
MR. SHORE: Thank you, Your Honor.
MR. GUY: Understood, Your Honor. And, Your Honor, I want to make one thing very clear for Mirant. We have tried very hard to resolve this to avoid having to withdraw the reference.
MR. SHORE: They don't have to withdraw the reference, Your Honor. If they want to threaten to withdraw the reference because they think they're going to get an Article III Judge to be their friend —
THE COURT: All right. All right. I'm not going to —
MR. GUY: This is for the Court. It isn't for Mr. Shore. Your Honor, we have avoided trying to do that and worked very hard to not do that. We have now been left with no choice by Mirant. . . .
III. Conclusion
In sum, your bankruptcy judge does not believe the Motion states a case for mandatory withdrawal of the reference. As to discretionary withdrawal, the Objections might better be heard by the District Court in the interests of judicial economy, given the possibility of future rejection proceedings. Though the Stay Motion, the Adversary and the Cost Motion could be heard efficiently in either the bankruptcy court or the District Court, your bankruptcy judge believes it preferable that they be initially considered in the bankruptcy court.
For the reasons stated, therefore, your bankruptcy judge recommends the Motion be granted as to the Objections and otherwise denied.